KBRA's risky ratings raise concerns over BX 2024-SLCT securitization

In a recent financial development in the United States, Kroll Bond Rating Agency (KBRA) announced the assignment of preliminary ratings to six classes of a commercial mortgage-backed security (CMBS), specifically BX 2024-SLCT. This single-borrower securitization is backed by a $615 million floating rate, interest-only mortgage loan. The loan carries an initial two-year term along with three one-year extension options and mandates monthly interest-only payments. The properties backing this loan include 23 hotels located across eight states and Washington, DC, comprising fee simple interests in 20 hotels and leasehold interests in three others. As of the trailing twelve months (TTM) ending in September 2024, the hotel portfolio reported an occupancy rate of 74.5%, with a noteworthy average daily rate (ADR) of approximately $205.64. The revenue per available room (RevPAR) demonstrated a solid return of $153.16. The portfolio's performance metrics indicated that the weighted average penetration rates for occupancy, ADR, and RevPAR were impressive at 101.3%, 97.0%, and 98.4%, respectively, compared to the wider market. KBRA conducted a comprehensive analysis of the transaction, which utilized established methodologies for assessing property cash flows specifically tailored for the North American CMBS market. This involved the application of the North American CMBS Property Evaluation Methodology and the Single Borrower & Large Loan Rating Methodology. Through this rigorous evaluation process, KBRA calculated a net cash flow (KNCF) for the hotel portfolio of roughly $73.9 million, which was recorded as 4.3% lower than the initial cash flows reported by the issuer. Additionally, KBRA estimated the overall value of the portfolio to be around $705.6 million, reflecting a significant 45.9% decrease compared to the appraiser's initial values. The resultant loan-to-value (LTV) ratio, based on KBRA's review, was pegged at 87.2%. The assessment of this financial transaction was further supported by a series of third-party reports evaluating engineering, environmental factors, and appraisal insights. Site inspections and thorough reviews of relevant legal documentation were also integral to the decision-making process and the final ratings assigned by KBRA. This information offers a detailed perspective on the current state of the CMBS market concerning the BX 2024-SLCT securitization and reflects the cautious optimism of credit rating agencies as they evaluate the underlying mortgage performance within the competitive hospitality sector.